This invention relates generally to an automated system for investment management and more specifically to a computerized system for managing the investment of capital in markets to receive income and capital gains while minimizing the risk of loss of net asset value.
Any form of investment implicates the “risk/reward ratio,” which represents the relationship between the possibilities of profit (reward) and the concomitant possibilities for loss (risk). An investor's ability to withstand risk usually depends on the person's overall economic position and economic needs, which in turn sets the amount of reward. The only way to increase the reward for a given risk is to change the ratio. Doing so, however, has proven difficult.
The most direct way to increase reward is to buy low and sell high, but following this simple and elegant rule has proven difficult because it requires predictive powers. It is not possible to know whether the market was at a high or low until well after the point in time passes.
In addition, human emotion enters into and complicates investment decisions. For example, when a stock's price falls, many investors want to keep the stock hoping to break even or win when the stock's price recovers. Similarly, when a stock's price rises, many investors choose to hold the stock out of fear of selling below the best price. Both decisions are seldom wise in the long run.
A sound investment strategy should remove emotion from decision-making, but most investment strategies lack any plan to indicate when to buy and when to sell. Some investment models explain when to buy, but not when to sell. For example, a portfolio manager may place a sell order at a specific price, but the manager generally lacks any quantitative means to determine the selling price. That value depends as much on guesswork as it does on science.
Many financial planners also recommend “asset allocation models,” such as 60% equities, 30% fixed income obligations, and 10% cash or money-market type funds. The problem remains, however, when to liquidate and when to purchase assets. Moreover, mere asset allocation does not include systematic profit taking, only systematic investment to maintain the proper ratios.